S&P 500 Hits 42nd Record Close, Most Since 1998

By Ben Levisohn

It’s Christmas time, and there’s no need to be afraid. The market wants to go up heading into the New Year, and today Darden Restaurants (DRI), PulteGroup (PHM), U.S. Steel (X), Tesoro (TSO) and Masco (MAS) helped lead the way.

REUTERS

The S&P 500 rose 0.5% to 1,827.99 today–its 42nd record high this year, the most since 1998–while the Dow Jones Industrial Average gained 0.5% to 16,294.61–the most since 1995.

Yes, the major benchmarks have hit a massive amount of new highs this year and that feels kind of scary–but it’s not necessarily bad news. The Dow gained 33% in 1995, then another 26% in 1996. The S&P 500 gained 27% in 1998, before advancing another 20% in 1999 (let’s not to talk about what happened next).

Stocks got a boost from strong consumers spending and confidence data, both of which auger a stronger economy in 2014. Goldman Sachs’ David Kostin and team offer two ways to play the pickup in economic growth next year:

Recent macro and micro data point to a strengthening US outlook. The Fed’s decision to start tapering indicates macro fundamentals are improving. Micro data such as [Oracle (ORCL), FedEx (FDX), and Nike's (NKE)] quarterly results and 2014 guidance corroborate that view. We recommend two strategies to benefit from accelerating growth. (1) Firms investing in capex: Stocks that have underinvested in recent years but have high ROIC that we believe will boost spending in 2014 should outperform. (2) Stocks with high operating leverage: Economic growth will boost sales, and firms with high operating leverage will benefit most in terms of EPS uplift and that should drive returns.

Still, Kostin only expects the S&P 500 to close near 1,900, just 3.9% higher than today’s close.

The S&P 500 is set up for two consecutive up years in 2012 and 2013. When the S&P 500 has two up years in a row, the next year is up 58% of the time and has an average return of 3.3%. This compares with an average annual return of 7.2% and positive annual returns 66% of the time going back to 1928. Based on history, the S&P 500 could have difficulty matching the 2012 and 2013 (YTD) gains of 13.4% and 27.5%, respectively, in 2014.

About Stocks To Watch

Earnings reports, corporate strategies and analyst insights are all part of what moves stocks, and they’re all covered by the Stocks to Watch blog. We also look at macro issues, investor sentiments and hidden trends that are affecting the market. Stocks to Watch gives you the full picture of the U.S. stock markets, all day long.

The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.